BUFFALO, N.Y. – Corporations with board directors who have
investment banking experience are more likely to acquire other
businesses – and make better acquisitions when they do
– according to a new study from the University at Buffalo
School of Management.

Forthcoming in the Journal of Financial Economics, the study
found that directors with investment banking experience help their
firms to select better businesses to acquire, more accurately
determine the value of the target business and either reduce
reliance on mergers and acquisition consultants or negotiate lower
advisory fees.

“We found that, all other things being equal, firms with
investment banking directors on the board are more than 13 percent
more likely to make acquisitions the following year,” says
study co-author Feng (Jack) Jiang, PhD, assistant professor of
finance and managerial economics in the UB School of Management.
“Relevant experience and financial literacy are important
when serving on corporate boards.”

The study defined investment banking directors as outside
directors – a non-employee member of a company’s board
of directors – who had past or concurrent working experience
as either top executives or senior managers at one of the most
active mergers and acquisitions advising firms. It used a sample of
more than 41,000 firm-year observations from 1998-2008 and found a
positive relationship between the presence of investment banking
directors and the firm’s probability of making
acquisitions.

In addition, the research examined whether corporate boards with
investment banker directors make better acquisitions than those
without. Using a sample of nearly 2,500 acquisitions announced from
1999-2008, the study found that firms with investment banking
directors are associated with 0.8 percent higher abnormal
announcement returns, which translates to $36 million in increased
value for shareholders.

These findings are counter to a 2008 study by Güner,
Malmendier and Tate that found that the presence of investment
bankers on boards was associated with worse acquisitions.

“There was a conflict of interest for the investment
banking directors in that study – they were affiliated with
the investment banks involved in the takeover process,” says
Jiang. “We specifically looked at investment banking
directors without a conflict of interest and found their expertise
generally benefits shareholders in mergers and
acquisitions.”

The UB School of Management is recognized for its emphasis on
real-world learning, community and economic impact, and the global
perspective of its faculty, students and alumni. The school also
has been ranked by Bloomberg Businessweek, the Financial Times,
Forbes and U.S. News and World Report for the quality of its
programs and the return on investment it provides its graduates.
For more information about the UB School of Management, visit http://mgt.buffalo.edu.

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